Hazards Of Increasing Cigarette Taxes

December 15, 1999

The New York State Legislature is reportedly planning a 25 cent rise in the state's current 56 cents per-pack cigarette tax, giving New York the fourth-highest cigarette tax rate in the U.S. If experience is any guide, it will lead to a sharp rise in smuggling that will make cigarettes more easily available for youngsters.

In 1997,the state attorney general estimated the state was losing $300 million per year in revenue from cigarette bootlegging.

The losses have undoubtedly risen, since any smoker with a computer now has easy access to tax-free cigarettes, often sold legally from Indian reservations -- one web site, www.discount-cigarettes.org, lists more than 50 sources for such cigarettes.

North Carolina and Virginia tax cigarettes at just 5 cents and 2.5 cents a pack, respectively; smugglers buy and distribute truckloads of cigarettes from those states in Maryland (66 cents per pack), New Jersey (80 cents), Massachusetts (76 cents) and, of course, New York.

Smuggling rose in these states after they raised their cigarette taxes. For example, when New Jersey doubled its tax on Jan. 1, 1998, state officials detected an immediate rise in smuggling, according to the Newark Star-Ledger. And after Maryland hiked its rate by 30 cents earlier this year, the Baltimore Sun reported state officials were so overwhelmed with smuggling cases they had to lease new storage space to hold the seized smokes.

The rise of smuggling also means testablished retailers that are easier to police for illegal sales to minors are being replaced by informal sales networks selling cigarettes to those of any age with cash. In Europe, the smuggling problem has led some countries, like Sweden, to actually cut their tax rates. Indeed, lower tax rates can even raise government revenue.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), "Taxing Cigarettes May Be Hazardous," New York Post, December 15, 1999.